Income Tax (Trading and Other Income) Act 2005

Chapter 9 Trade profits: films and sound recordings

Introduction

130 Expenditure to which this Chapter applies

(1) This Chapter makes provision about—

(a) expenditure incurred on the production or acquisition of the original master version of a film or sound recording, and

(b) preliminary expenditure in relation to a film.

(2) In this Chapter references to production expenditure are to expenditure incurred on the production of the original master version of a film or sound recording.

(3) In this Chapter references to acquisition expenditure are to expenditure incurred on the acquisition of the original master version of a film or sound recording.

(4) In this Chapter references to the original master version of a film or sound recording include any rights in the original master version of a film or sound recording that are held or acquired with it.

(5) In this Chapter references to production or acquisition expenditure do not include—

(a) interest (as to which, see section 29), or

(b) the incidental costs of obtaining finance (as to which, see sections 58 and 59).

(6) In this Chapter “preliminary expenditure”, in relation to a film, means expenditure which—

(a) can reasonably be said to have been incurred with a view to enabling a decision to be taken as to whether to make the film,

(b) is payable before the first day of principal photography (if the decision is to make the film), and

(c) is not repayable under a contract or other arrangement if the film is not made.

(7) In this Chapter “any prohibitive rule” means any provision of the Income Tax Acts which—

(a) prohibits a deduction from being made, or

(b) restricts the extent to which it is allowed,

in calculating the profits of a trade.

131 Meaning of “film” and related expressions

(1) In this Chapter “film” includes any record, however made, of a sequence of visual images which is capable of being used as a means of showing that sequence as a moving picture.

(2) For the purposes of this Chapter each part of a series of films is treated as a separate film.

(3) But if the Secretary of State has given a direction under paragraph 1(4) of Schedule 1 to the Films Act 1985 (c. 21) that parts of a series of films are to be treated as a single film for the purposes of that Schedule, they are also treated as a single film for the purposes of this Chapter.

(4) In this Chapter references to a film include the film soundtrack (if any).

(5) For the purposes of this Chapter a film is completed when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and distributed for presentation to the general public.

132 Meaning of “original master version” and “certified master version”

(1) In this Chapter “original master version” means—

(a) in relation to a film, the original master negative, tape or disc, and

(b) in relation to a sound recording, the original master audio tape or disc.

(2) In this Chapter references to the original master version of a film include the original master version of the film soundtrack (if any).

(3) In this Chapter “certified master version”, in relation to a film, means an original master negative, tape or disc which is certified under paragraph 3 of Schedule 1 to the Films Act 1985 as a qualifying film, tape or disc for the purposes of this Chapter.

133 Meaning of “relevant period”

In this Chapter “relevant period”, in relation to a trade, means—

(a) a period of account of the trade, or

(b) if no accounts of the trade are drawn up for a period, the basis period for a tax year.

Expenditure treated as revenue in nature

134 Expenditure treated as revenue in nature

(1) If a person carrying on a trade incurs production or acquisition expenditure, the expenditure is treated for income tax purposes as expenditure of a revenue nature.

(2) If expenditure is treated under this section as revenue in nature, sums received by the person carrying on the trade from the disposal of the original master version—

(a) are treated for income tax purposes as receipts of a revenue nature, and

(b) are brought into account in calculating the profits of the trade of the relevant period in which they are received.

(3) For this purpose sums received from the disposal of the original master version include—

(a) sums received from the disposal of any interest or right in or over the original master version (including an interest or right created by the disposal), and

(b) insurance, compensation or similar money derived from the original master version.

(4) This section does not apply if an election under section 143 below or section 40D of F(No.2)A 1992 (corresponding corporation tax provision) has effect in relation to the expenditure.

Films and sound recordings: normal rules for allocating expenditure

135 Films and sound recordings: production or acquisition expenditure

(1) This section applies for the purpose of calculating the profits of a trade of a relevant period if—

(a) the trade consists of or includes the exploitation of the original master versions of films or sound recordings,

(b) the original master versions do not constitute trading stock of the trade (within the meaning of section 174),

(c) the person carrying on the trade incurs production or acquisition expenditure in, or before, the relevant period, and

(d) no election under section 143 below or section 40D of F(No.2)A 1992 has effect in relation to the expenditure.

(2) A deduction is allowed for the amount of the production or acquisition expenditure allocated to the relevant period, but this is subject to the application of any prohibitive rule.

(3) The person carrying on the trade must allocate to the relevant period so much of the expenditure as is just and reasonable (but see subsection (5)).

(4) In making this allocation regard must be had to the following—

(a) the amount of the expenditure which remains unallocated at the beginning of the period,

(b) the amount of the expenditure incurred in the period,

(c) the proportion which the estimated value of the original master version realised in the period (by way of income or otherwise) bears to the sum of the value so realised and the estimated remaining value at the end of the period, and

(d) the need to bring the whole of the expenditure into account over the time during which the value of the original master version is expected to be realised.

(5) The person carrying on the trade may also allocate to the relevant period a further amount, so long as the total amount allocated to the period does not exceed the value of the original master version realised in the period (by way of income or otherwise).

(6) Expenditure may not be allocated to the relevant period under this section if it is allocated—

(a) under this section to any other relevant period,

(b) under any other provision of this Chapter to the relevant period or any other relevant period,

(c) under section 40B of F(No.2)A 1992 (corporation tax provision corresponding to this section) to any other relevant period, or

(d) under section 41 of that Act (corporation tax provision corresponding to section 137 below) or 42 of that Act (corporation tax provision corresponding to sections 138 to 140 below) to the relevant period or any other relevant period.

(7) If any expenditure in respect of the original master version is allocated to the relevant period—

(a) under any other provision of this Chapter, or

(b) under section 41 or 42 of F(No.2)A 1992,

no other production or acquisition expenditure in respect of the original master version may be allocated to the relevant period under this section.

Certified master versions: special rules for allocating expenditure

136 Application of provisions about certified master versions

Sections 137 to 140 (certified master versions: certain expenditure) apply for the purpose of calculating the profits of a trade of a relevant period if—

(a) the trade consists of or includes the exploitation of films,

(b) the films do not constitute trading stock of the trade (within the meaning of section 174),

(c) the expenditure in question is of a revenue nature (whether as a result of section 134 or otherwise), and

(d) no election under section 143 below or section 40D of F(No.2)A 1992 has effect in relation to the expenditure.

137 Certified master versions: preliminary expenditure

(1) This section applies if—

(a) the person carrying on the trade has incurred preliminary expenditure in connection with a film in, or before, the relevant period,

(b) the certified master version condition is met (see subsection (2)), and

(c) the film is genuinely intended for theatrical release.

(2) The certified master version condition is—

(a) if the film is completed, that the original master version of it is a certified master version, or

(b) if the film is not completed, that it is reasonably likely that, if the film were completed, the original master version of it would be a certified master version.

(3) A deduction is allowed for the amount of the preliminary expenditure allocated to the relevant period, but this is subject to the application of any prohibitive rule.

(4) The person carrying on the trade may allocate up to 100% of the preliminary expenditure to the relevant period.

(5) But the total amount allocated under this section must not exceed 20% of the budgeted total expenditure on the film, calculated as at the first day of principal photography.

(6) Expenditure may not be allocated to the relevant period under this section if—

(a) it is allocated under this section to any other relevant period,

(b) it is allocated under any other provision of this Chapter to the relevant period or any other relevant period,

(c) it is allocated under section 41 of F(No.2)A 1992 to any other relevant period,

(d) it is allocated under section 40B or 42 of that Act to the relevant period or any other relevant period, or

(e) a deduction in respect of it has otherwise been made in calculating the profits of the trade for income or corporation tax purposes.

(7) If any preliminary expenditure in connection with the film is allocated to the relevant period—

(a) under section 135 above, or

(b) under section 40B of F(No.2)A 1992,

no other preliminary expenditure in connection with the film may be allocated to the relevant period under this section.

(8) So far as a deduction is given in respect of any expenditure—

(a) under this section, or

(b) under section 41 of F(No.2)A 1992,

no further deduction is allowed in respect of that expenditure in calculating the profits of the trade for income tax purposes.

138 Certified master versions: production or acquisition expenditure

(1) This section applies if—

(a) the person carrying on the trade has incurred production or acquisition expenditure in respect of the original master version of a film in, or before, the relevant period,

(b) the film was completed in, or before, that period,

(c) the original master version is a certified master version, and

(d) the film is genuinely intended for theatrical release.

(2) A deduction is allowed for the amount of the expenditure allocated to the relevant period, but this is subject to the application of any prohibitive rule.

(3) The person carrying on the trade may allocate up to the permissible amount of the expenditure to the relevant period.

(4) The permissible amount of the expenditure is the smallest amount given by the following calculations.

(5) The calculations are—

• Calculation 1

  Calculate one-third of the total production or acquisition expenditure incurred by the person in respect of the original master version (“the total expenditure”).

• Calculation 2

  Calculate one-third of the sum obtained by deducting from the total expenditure—

  (a)

    any amount of the total expenditure already allocated under section 137,

  (b)

    any amount of the total expenditure already allocated under section 41 of F(No.2)A 1992, and

  (c)

    any amount of the total expenditure that has already been, or is capable of being, allocated under section 139 or 140 below or under section 42 of F(No.2)A 1992 as applied by section 48(1) to (3) of F(No.2)A 1997 (corresponding corporation tax provision).

• Calculation 3

  Calculate so much of the total expenditure as has not already been allocated to the relevant period or any other relevant period—

  (a)

    under this section or any other provision of this Chapter, or

  (b)

    under any of sections 40B, 41 or 42 of F(No.2)A 1992.

(6) If the relevant period is less than 12 months the above references to one-third are to be read as references to a proportionately smaller fraction.

(7) If any production or acquisition expenditure in respect of the original master version is allocated to the relevant period—

(a) under section 135 above, or

(b) under section 40B of F(No.2)A 1992,

no other production or acquisition expenditure in respect of the original master version may be allocated to the relevant period under this section.

Certified master versions: limited-budget films

139 Certified master versions: production expenditure on limited-budget films

(1) This section applies if—

(a) the person carrying on the trade has incurred production expenditure in respect of the original master version of a film in, or before, the relevant period,

(b) the expenditure was incurred before 2nd July 2005 (see section 142 for timing rule),

(c) the original master version is a certified master version,

(d) the film is genuinely intended for theatrical release, and

(e) the total production expenditure in respect of the original master version is £15 million or less (see section 141).

(2) A deduction is allowed for the amount of the production expenditure allocated to the relevant period, but this is subject to the application of any prohibitive rule.

(3) The person carrying on the trade may allocate up to 100% of the production expenditure to the relevant period.

(4) Any expenditure which—

(a) has not been paid at the time the film is completed, and

(b) is not, at that time, the subject of an unconditional obligation to pay within 4 months after the date of completion,

is not regarded as production expenditure for the purposes of this section.

(5) Expenditure may not be allocated to the relevant period under this section if it is allocated—

(a) under this section to any other relevant period,

(b) under any other provision of this Chapter to the relevant period or any other relevant period,

(c) under section 42 of F(No.2)A 1992 as applied by section 48(1) and (2) of F(No.2)A 1997 (corporation tax provision corresponding to this section) to any other relevant period, or

(d) under section 40B or 41 of F(No.2)A 1992, or section 42 of that Act (but not as applied by section 48(1) and (2) of F(No.2)A 1997), to the relevant period or any other relevant period.

(6) If any production expenditure in respect of the original master version is allocated to the relevant period—

(a) under section 135 above, or

(b) under section 40B of F(No.2)A 1992,

no other production expenditure in respect of the original master version may be allocated to the relevant period under this section.

140 Certified master versions: acquisition expenditure on limited-budget films

(1) This section applies if—

(a) the person carrying on the trade has incurred acquisition expenditure in respect of the original master version of a film in, or before, the relevant period,

(b) the acquisition was a relevant acquisition (see subsection (2)),

(c) the expenditure was incurred before 2nd July 2005 (see section 142 for timing rule),

(d) the original master version is a certified master version,

(e) the film is genuinely intended for theatrical release, and

(f) the total production expenditure in respect of the original master version is £15 million or less (see section 141).

(2) An acquisition is a relevant acquisition if—

(a) the acquisition is by the producer and the producer has not previously acquired the original master version of the film, or

(b) the acquisition is directly from the producer and the original master version of the film has not previously been acquired directly from the producer,

and for this purpose “the producer” means the person who commissions the making of the film and is entitled to control its exploitation.

(3) A deduction is allowed for the amount of the acquisition expenditure allocated to the relevant period, but this is subject to the application of any prohibitive rule.

(4) The person carrying on the trade may allocate up to 100% of the acquisition expenditure to the relevant period.

(5) But the total amount allocated under this section may not exceed the total production expenditure in respect of the original master version.

(6) Expenditure may not be allocated to the relevant period under this section if it is allocated—

(a) under this section to any other relevant period,

(b) under any other provision of this Chapter to the relevant period or any other relevant period,

(c) under section 42 of F(No.2)A 1992 as applied by section 48(1) to (3) of F(No.2)A 1997 to any other relevant period, or

(d) under section 40B or 41 of F(No.2)A 1992, or section 42 of that Act (but not as applied by section 48(1) to (3) of F(No.2)A 1997), to the relevant period or any other relevant period.

(7) If any acquisition expenditure in respect of the original master version is allocated to the relevant period—

(a) under section 135 above, or

(b) under section 40B of F(No.2)A 1992,

no other acquisition expenditure in respect of the original master version may be allocated to the relevant period under this section.

141 “Total production expenditure in respect of the original master version”

(1) The following provisions of this section define what is meant by “the total production expenditure in respect of the original master version” for the purposes of sections 139 and 140.

(2) “The total production expenditure in respect of the original master version” means the total of all the production expenditure in respect of the original master version—

(a) whenever the expenditure is incurred, and

(b) whether or not it is incurred by the person carrying on the trade.

(3) Any expenditure which—

(a) has not been paid at the time the film is completed, and

(b) is not, at that time, the subject of an unconditional obligation to pay within 4 months after the date of completion,

is ignored.

(4) Any part of the production expenditure in respect of the original master version which—

(a) is incurred by a person under or as a result of a transaction entered into directly or indirectly between that person and a connected person, and

(b) might have been expected to have been of a greater amount (“the arm’s length amount”) if the transaction had been between independent persons dealing at arm’s length,

is treated as having been of an amount equal to the arm’s length amount.

142 When expenditure is incurred

(1) This section applies to determine when expenditure is treated as incurred for the purposes of sections 139 and 140.

(2) The general rule is that an amount of expenditure is treated as incurred as soon as there is an unconditional obligation to pay it.

(3) The general rule applies even if the whole or a part of the expenditure is not required to be paid until a later date.

(4) There are the following exceptions to the general rule.

(5) If under an agreement—

(a) the expenditure is on the provision of an original master version,

(b) an unconditional obligation to pay an amount of the expenditure comes into being as a result of the giving of a certificate or any other event,

(c) the giving of the certificate, or other event, occurs within the period of one month after the end of a relevant period, and

(d) at or before the end of the relevant period, the original master version has become the property of, or is otherwise under the agreement attributed to, the person subject to the unconditional obligation to pay,

the expenditure is treated as incurred immediately before the end of the relevant period.

(6) If under an agreement an amount of expenditure is not required to be paid until a date more than 4 months after the unconditional obligation to pay has come into being, the amount is treated as incurred on that date.

(7) If under an agreement—

(a) there is an unconditional obligation to pay an amount of expenditure on a date earlier than accords with normal commercial usage, and

(b) the sole or main benefit which might (as a result) have been expected to be obtained is that the amount would be treated, under the general rule, as incurred at an earlier time,

the amount is treated as incurred on the date on or before which it is required to be paid.

Election for sections 134 to 140 not to apply

143 Election for sections 134 to 140 not to apply

(1) A person carrying on a trade which consists of or includes the exploitation of original master versions of films may elect for sections 134 to 140 not to apply in relation to expenditure if—

(a) the person incurs expenditure on the production or acquisition of an original master version of a film,

(b) the original master version is a certified master version,

(c) its value is expected to be realisable over a period of not less than two years, and

(d) the film is genuinely intended for theatrical release.

(2) The election must relate to all expenditure—

(a) incurred, or

(b) to be incurred,

on the production or acquisition of the original master version in question.

(3) The election is irrevocable.

(4) The election must be made on or before the first anniversary of the normal self-assessment filing date for the tax year in which ends the relevant period in which the original master version of the film is completed.

(5) For this purpose a film is completed—

(a) at the time given by section 131(5), or

(b) if the expenditure is acquisition expenditure and the acquisition takes place after that time, at the time of the acquisition.

(6) No election may be made in relation to expenditure on the production or acquisition of an original master version of a film if any of that expenditure has been allocated—

(a) under any of sections 137 to 140 above, or

(b) under section 41 or 42 of F(No.2)A 1992.

Supplementary

144 Meaning of “genuinely intended for theatrical release”

(1) This section determines for the purposes of this Chapter whether films are genuinely intended for theatrical release.

(2) The relevant intention is the intention at the time the film is completed of the person then entitled to determine how the film is to be exploited.

(3) “Theatrical release” means exhibition to the paying public at the commercial cinema.

(4) A film is not regarded as genuinely intended for theatrical release unless it is intended that a significant proportion of the earnings from the film should be obtained by exhibition to the paying public at the commercial cinema.